Search results

Abstract
We explain how to use the composite likelihood function to ameliorate estimation, computational and inferential problems in dynamic stochastic general equilibrium models. We combine the information present in different models or data sets to estimate the parameters common across models. We provide intuition for why the methodology works and alternative interpretations of the estimators we construct and of the statistics we employ. We present a number of situations where the methodology has the potential to resolve well-known problems and to provide a justification for existing practices that pool different estimates. In each case, we provide an example to illustrate how the approach works and its properties in practice.

The recent crisis in the United States has often been associated with substantial amounts of policy uncertainty. In this paper we ask how uncertainty about fiscal policy affects the impact of fiscal policy changes on the economy when the government tries to counteract a deep recession. The agents in our model act as econometricians by estimating the policy rules for the different fiscal policy instruments, which include distortionary tax rates. Comparing the outcomes in our model to those under full-information rational expectations, we find that assuming that agents are not instantaneously aware of the new fiscal policy regime (or policy rule) in place leads to substantially more volatility in the short run and persistent differences in average outcomes.

Despite intense scrutiny, estimates of the government spending multiplier remain highly uncertain, with values ranging from 0.5 to 2. While an increase in government spending is generally assumed to have the same (mirror-image) effect as a decrease in government spending, we show that relaxing this assumption is important to understand the effects of fiscal policy. Regardless of whether we identify government spending shocks from (i) a narrative approach, or (ii) a timing restriction, we find that the contractionary multiplier -the multiplier associated with a negative shock to government spending- is above 1, while the expansionary multiplier -the multiplier associated with a positive shock- is substantially below 1. The multiplier is largest in recessions, as found in previous studies, but only because the contractionary multiplier is largest in recessions. The expansionary multiplier is always below 1 and not larger in recessions. We argue that our results help understand the wide range of multiplier estimates found in the literature.